A few months ago, word leaked out that the Pac-12 was looking at a unique strategy to add an influx of cash to the conference: Selling an equity stake in its media rights holding company for a whopping $750 million.
Many people laughed. Others tried to give it serious consideration and came away ... skeptical — to put it charitably — that a $5 billion valuation was realistic.
But the Sports Business Journal is reporting today that the conference has received “multiple bids” in excess of the $750 million ask, which would represent a roughly 15% stake in the holding company.
The Pac-12 has "multiple bids of at least $750 million in hand from companies looking to become equity investors in the conference," reports @SmittySBJ in tonight's SBJ College newsletter. Final decision to come "in months." https://t.co/HgwIBzLEgl pic.twitter.com/FVeRYyp2vK— John Ourand (@Ourand_SBJ) June 7, 2019
Most of the story is behind a paywall, but you get the gist. Such a capital investment would likely result in a payout of roughly $60 million to each of the member schools, although nobody knows the details of how such a payout would be structured — whether in one lump sum or annual payouts over the term of the investment, which is thought to be a 25-year commitment.
The big payday would do at least something to close the revenue gap between the conference and its peers ... but, of course, this comes with a tradeoff. This isn’t the lottery; the equity firm is going to want a return on its investment.
We obviously don’t know very many details here, so the analysis that follows comes with that caveat. Oh, and also this one: I’m hardly a businessman, so feel free to set me straight where you think I might be off course. This is all very, very back-of-the-napkin/watercooler talk stuff.
To start with, here’s how I understand the basics of equity deals:
- An equity partner is sought when a company believes an influx of cash will both help meet current needs and increase the capacity for future earnings;
- In exchange, you share future profits with this investor;
- If it all goes according to plan, the company makes much more money than it otherwise would have without the investment such that both the company and investor come out ahead of where they would have without the investment.
- (At least, this is what I learned watching Shark Tank.)
If all of this is indeed true, I have a lot of questions.
How is this equity stake going to increase the profitability of media rights, since that’s what the investment is tied to? And if it’s not, is it possible that it actually leads to lower media distributions for the schools, after the equity partner starts taking its cut?
If we assume a 15% return on their 15% stake, that would currently amount to a reduction of about $4.5 million a year in payouts to each school. Of course, that’s offset by the immediate cash influx, but on a 25-year timetable, you’re trading $4.5 million a year immediately for $2.4 million a year in the long run — a net loss of $2 million a year in the end. (That’s also a deficit that will grow, because we know there will be a media rights increase with the next negotiated deal.)
Unless, of course, you end up getting $2 million-plus more a year in the end explicitly because this investment enables you to grow in a way that you wouldn’t otherwise have been able to.
But ... how? How is this going to unlock additional revenue?
If you’re a maker of widgets, and you go to an investor and say “for your $XX million investment, we can make XXXXXX more widgets and expand into XX market(s) which should lead to XX% growth in revenue,” that makes sense, right? But if you’re the Pac-12, what’s your pitch? “For your $750 million investment, you can take a 15% cut of future media revenues, which are going to increase because of your $750 million investment which will lead to increased media rights ... somehow?”
Maybe one of the bidders is a media company who has an idea on that front. The Pac-12 is getting ready to negotiate its next media deal, so perhaps the partner sees an opportunity for a windfall there simply through strategic negotiation and distribution.
For a moment, though, let’s assume it’s not the kind of company that can bring that kind of value to the next media rights deal, or that even if they are, there’s just not much more water to squeeze from that rock.
Since almost all the cash will be going to the schools, the investment suggests that it would be on the schools to unlock its value. How does a school do that? About the only thing that increases media rights values long term is the football product; the SEC is already positioning itself to break the bank in a few years when its media deal expires, and it’ll probably get what it wants because it’s the undisputed football king. The surest way to get the ROI for the equity partner is to make sure the football product increases its relevancy and competitiveness. You have to win to such a degree that it forces the rest of the country to pay attention regardless of the time zone.
Which makes one wonder what kinds of conditions will be put on an investment of three quarters of a billion dollars. There are a number of Pac-12 schools who would, I’m sure, love to pay off a bunch of debt the way you and I pay off a credit card with a tax refund. But I can’t imagine an investor would be very inspired, for example, by the Washington State Cougars sending a bunch of money back to the general fund to pay back its operating deficits, paying off some or all of the construction bonds for the Cougar Football Complex, and then simply continuing to spend at current levels.
Which leads me to this question: Are schools going to be required to use a certain amount of it on new football spending in an effort to prop up the product and make it more valuable? If done right and in a coordinated way by the conference, this might actually work to raise the conference’s profile over the next 10-15 years and make this a profitable enterprise for both sides in the final 10 years of the deal.
But this is the Pac-12. And things are rarely done right and in a coordinated way. Which also leads me to this question:
Who’s going to be left holding the bag if this doesn’t work out?
These “equity partnerships” can often be predatory. The partner comes in and then bleeds the company dry with its stake, making a tidy profit for itself before it cashes out while everyone else loses. All they really care about is that they come out on the positive side in the end.
If this doesn’t work — if the investment itself doesn’t lead to greater profits — who’s stuck with the fallout? The universities, which are permanent institutions that aren’t going anywhere. Similar things have happened in newspapers, where “media corporations” reduce staffs to bare minimum levels to maximize margins, and once the last pennies have been squeezed out of the publication, they close up shop and liquidate assets (such as real estate) to goose the bottom line.
Obviously, this wouldn’t be that imbalanced, given the stake is only 15%. But you can be sure the investors will get theirs, one way or the other. And it’s not hard to see how this could end up being a long-term loser for the schools if the media landscape changes significantly — there’s a ton of uncertainty in that space. For example, those who might have have been hoping that digital media platforms would escalate the bidding might be disappointed; Twitter already has announced it’s merely looking to partner with rights holders rather than get into bidding wars for exclusivity.
However, to play devil’s advocate: Live sports programming is the one thing that seems to have been mostly immune to any sort of rights bubble. Perhaps that’s what makes an equity deal attractive to an investor, particularly if it’s a company that is savvy in the sports TV rights arena. Maybe they theoretically score a huge rights deal for the conference and cash out, enabling the conference to re-obtain 100% of the equity? I suppose anything is in play.
Clearly both sides of this potential deal think there’s an arrangement out there that could make sense. San Jose Mercury News reporter Jon Wilner isn’t convinced the conference will go down this route, even though I think the number of suitors makes the potential of a deal much more likely. Still, this is the Pac-12, and we know they’re often more comfortable with something approximating status quo. Perhaps this is much ado about nothing, 1,500 words that will be irrelevant in short order. ¯\_(ツ)_/¯
Maybe you see some flaws in my thinking. If so, set me straight below.
How are you feeling about this potential blatant cash grab by the Pac-12?
This poll is closed
Get that bread!!
I’m cautiously optimistic